India: Five Things To Know About M&A Transactions In India

Last Updated: 3 February 2014
Article by Shveta Nehra

Since the introduction of a new governmental policy in 1991 to bring in reforms to encourage investment in India, the number of cross-border mergers and acquisitions has increased. However, the Indian M&A sector remains highly regulated and even where a transaction may appear to be simple, additional approvals and consents may be required which will add time and cost to the transaction. This article looks at the five key things you should know about M&A transactions in India.


M&A activity in India is heavily regulated at all levels, including internal restructurings.  Principal regulators include the Securities and Exchange Board of India, the Reserve Bank of India (RBI), the Foreign Investment Promotion Board and the Competition Commission of India.

M&A transactions are principally governed by the Companies Act 2013; the Foreign Investment Policy of the government of India along with press notes and circulars issued by the Department of Investment Policy and Promotion; the Foreign Exchange Management Act 1999 and regulations made thereunder, including circulars and notifications issued by the RBI from time to time; and the Securities and Exchange Board of India Act 1992 and regulations made thereunder.

Foreign direct investment is prohibited in the following areas or activities:

  • gambling and betting;
  • lottery business including government, private and online lotteries;
  • chit fund business (a form of savings scheme practiced in India);
  • real estate business or construction of farm houses;
  • trading in transferable development rights;
  • manufacturing cigars, cheroots, cigarillos, cigarettes or tobacco or tobacco substitutes, and tobacco agriculture and plantation;
  • activities and activities/sectors that are not open to the private sector, including atomic energy and railway transport (other than mass rapid transport systems); and
  • Nidhi company business (a form of a non-banking finance company in India).

Foreign direct investment is permitted in all other sectors, subject to certain prescribed limits on investment in certain areas.

No matter how small the transaction is, it is important to ensure your transaction does not fall foul of any of the above regulations.   It is sometimes possible to obtain approval from the relevant Indian regulator to proceed with the transaction but this can be a timely and costly exercise and must be considered at the outset.

Authorised dealer bank

The RBI has published a list of banks that are authorised to deal in foreign exchange transactions in India.  The authorised dealer bank may be required to file certain forms with the Registrar of Companies in India or approve certain aspects of the transaction.  Accordingly, it is important to keep the authorised dealer bank abreast of the key details of the transaction at all times and to immediately notify the authorised bank of any changes to the structure of the transaction.

Escrow accounts

Monies may be held in escrow for a number of reasons.  Monies are often held in escrow where a transaction falls foul of one of the regulations and the parties are awaiting approval from the relevant Indian regulator to proceed with the transaction.  It takes time to set up an escrow account and agree the terms with the escrow agent so make sure you begin this process early on.  The terms of the escrow largely depend on the type of transaction and the reason for the creation of the escrow, but Indian escrow agents are often not permitted to pay interest on the escrow account and there is a limit, usually 6 months, on how long sums may be retained in an escrow account.

Corporate governance

As previously reported ( see our February 2013 update), last year the Indian government enacted the Companies Act 2013 which seeks to introduce new corporate governance measures to bring the internal structure of Indian companies in line with their foreign counterparts.  The changes have not yet been fully implemented and a number of regulations are yet to be drafted in order to give full effect to the provisions of the Companies Act 2013.  Until such time as the legislation has been fully implemented, it is important to ensure that internal checks and balances are in place even though they may not be compulsory at this stage.  It will save considerable time and cost at a later stage.


A body corporate resident in India will be taxed in India.  A body corporate is resident in India in any year for tax purposes if it is registered in India or if the control and management of its affairs is wholly situated in India.

A non-resident business is taxed in India on the amount of income accruing or arising (or deemed to accrue or arise) or received (or deemed to be received) from India.  India has entered into tax treaties with over 75 countries to avoid double taxation, including the US, UK, China, Japan, Germany, Singapore and Mauritius.

Some of the taxes to be aware of when doing business in India include:

  • service tax;
  • customs duty is imposed on the import and export of goods in India;
  • excise duty;
  • employers must withhold income tax at the applicable rate from the salary paid to an employee;
  • minimum alternative tax or alternative minimum tax – where the tax paid in India by a company, partnership or LLP is below a certain percentage, an additional tax will be payable on the profits of such an entity; and
  • stamp duty (which may be payable prior to execution of the share purchase agreement).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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